LYNCH, Dr David, Head of Policy and Markets, Australian Financial Markets Association

CHAIR: I welcome representatives from the Australian Financial Markets Association to today’s hearing. Would you like to make an opening statement?

Dr Lynch: Yes. Thank you for the opportunity to appear and give evidence before the committee. The Australian Financial Markets Association represents participants in Australia’s financial markets, including energy derivatives and environmental products markets. AFMA’s membership includes a broad range of financial intermediaries and more than 30 energy companies. In keeping with our role and expertise as a financial markets industry association, AFMA seeks to contribute to the policy debate on climate change by highlighting the relevance of market based solutions and by promoting conditions that would support an effective carbon market, particularly in regard to pricing and resource allocation.

Working with our members, AFMA also provides technical market infrastructure to assist the development of markets, including standardised documentation to facilitate a carbon market, market revaluation data and trading protocols, as well as training and accreditation. As an association of financial market participants, AFMA focuses on the market issues and not the broader carbon scheme issues, except insofar as they impact on the market and its efficient operation.

My colleague Mr Jeffree works closely with AFMA’s carbon markets committee who considers these more technical issues and he will provide some brief technical comments as a summary opening.

Mr Jeffree: AFMA has identified a number of preconditions that must be met in order for a carbon market to operate effectively. These include requirements that the market should have scale and scarcity to attract risk capital to promote liquidity; have many willing buyers and sellers to assist price formation; not have asymmetric information so as to perform prices efficiently; have a governance process to support market integrity and promote participant confidence in an efficient, fair and orderly market; provide information to facilitate research and market analysis so as to support effective trading and investment decisions; and have simple and transparent market rules.

AFMA views the government’s commitment to a market based approach as a positive development. Our members collectively believe that a market based solution is the most efficient way to achieve lower carbon emissions. A government can control either the price or the quantity of emissions, but not both, so a tax inherently limits its capacity to meet the quantity of target for emissions. Unlike a market, a tax provides no forward pricing insight to assist investment financing and decision making, nor would it provide the international linkages that would help reduce abatement costs. Moreover, we think a tax would not be a simple mechanism to implement and it would not provide the level of certainty that business investors seek over time. Hence, we believe that an emissions trading system is superior to a carbon tax as a mechanism to implement climate change policy. We are happy to take questions.

CHAIR: Just upfront, in your submission you say that you believe that the adoption of a market based mechanism is an economically superior approach and that the introduction of a carbon tax would be a costly mistake for the economy. What do you mean by that?

Mr Jeffree: In terms of achieving the greatest efficiencies, we are fully behind a market mechanism, as opposed to a tax. With the market mechanism you would get lower cost impacts for the economy than with a tax.

CHAIR: Can you flesh that out a bit? Let us say the carbon tax is a price on carbon at the same level of $25 or $26 a tonne, the same level as a carbon pollution reduction scheme or an emissions trading scheme for that matter. Why is one preferable to the other?

Mr Jeffree: AFMA believes that a market based approach which places a price on greenhouse emissions is the most effective and economically efficient mechanism to lower our carbon intensity. Our view is consistent with the findings of a range of government reports in recent years.

CHAIR: You are reading something there. You did not know what question was coming here.

Mr Jeffree: No, that is right.

CHAIR: You expected that question. I am just a bit surprised that as soon as I asked the question you start reading a document.

Mr Jeffree: I thought you might ask why we support a market mechanism.

CHAIR: You need to listen to my question. My question is why a price on carbon through a carbon tax at the same level would be a worse proposition than a price on carbon through an emissions trading scheme?

Dr Lynch: In rephrasing the question it helps a little bit. The question is: if the tax was set at the same level as the market would determine and in essence, through the market process, you get an interaction of supply and demand for emissions permits which will determine the price.

CHAIR: So the price could be higher?

Dr Lynch: Not necessarily. It could be higher or lower. It depends on what level the tax was set at. The issue goes to the quality of price formation. When you look at the question of price formation, if you set a tax in place, for it to achieve the same outcomes as the market would, you would have to assume that the government has insights on all of the various costs and abatement mechanisms available to all participants in the economy. The questions of cost then flow to a number of things. In terms of reducing abatement cost, to the extent that you can connect with overseas schemes—this would be over a period of time—that potentially reduces the abatement cost because the cost abatements are not consistent across all jurisdictions, so it gives Australia an opportunity to tap into some lower cost abatement mechanisms overseas. It also goes to the question of the quality of the price—

CHAIR: We do not have that opportunity to tap into a global scheme, do we?

Dr Lynch: The intention over time in the design of the emissions trading system was that it would do that, and certainly these schemes in Europe and the ability for compliant entities to use the Kyoto units would provide mechanisms through which that could be achieved. The costs flow to the question of setting the right price and with a tax it would be fortunate if it were to set the right price.

One of the benefits of a market is that the price that is determined will be somewhat volatile because it will move in line with the net balance of supply and demand. The benefit from that is that it is providing signals to the economy in terms of how people should be reacting to those prices through abatement measures and looking at investment opportunities which would achieve abatement outcomes.

There are a number of ways in which an ETS is superior and I think it has economic benefits. Price formation is very important and international connectivity is quite important as well.

CHAIR: The problem that we are trying to address is a global problem, trying to reduce global greenhouse gas emissions. The market is a global market, but there is no consensus around creating a global market with all of the features that you talk about where you have got appropriate scale, scarcity, transparent information, market integrity and where you have an appropriate way that price formation, for want of a better word, that can occur so that you can go to the lowest cost abatement opportunities around the world. We do not have consensus around the global market, and in the absence of that, does Australia setting up a market in isolation of a global market not create distortions to such an extent where we actually end up with potentially counterproductive outcomes?

Dr Lynch: It goes to the question of having an emissions target in the first case. Our proposition is that once you have set an emissions target for the economy it is a question of what is the most effective mechanism to achieve that.

CHAIR: I am not meaning to be rude, but it comes back to what it is that you are trying to fix. You have set a domestic emissions reduction target with a view of helping to reduce global greenhouse gas emissions, but if you reduce emissions in Australia in a way that increases them by more in other parts of the world then we have not worked towards our overall objective, have we?

Dr Lynch: No. In designing an emissions trading system it was recognised for export intensive industries that you would need to accommodate their needs to minimise the potential for that kind of shifting to occur, so in other words they would remain competitive. To that extent, you would have emissions reductions taking place here, but those people who are most exposed in the economic sense would be protected to some degree until the global market was at the same level.

CHAIR: So those that are most exposed and not everyone?

Dr Lynch: Yes.

CHAIR: So some people will end up paying an additional cost, even though it might end up shifting emissions overseas and result in distortions?

Dr Lynch: It would depend on the final nature of the compensation. I cannot say yes or no to that because I do not have that insight. I believe the intention is that a trading system could be designed to provide the kind of assurances which people have sought.

CHAIR: Tell me a bit about your members and what their level of involvement would be in a trading scheme, when you say they stand ready to make it happen? Just talk us through the mechanics of all of that.

Mr Jeffree: We have over 30 members involved in energy markets and carbon markets. We have banks, generators, retailers and brokers, and they would be involved in facilitating market—

CHAIR: What sort of products would you develop around all of this?

Mr Jeffree: Derivative products would be the first step, to allow companies to effectively buy insurance and hedge their positions against the underlying physical or underlying carbon permit market.

CHAIR: Which sort of brings in another level of risk, does it not? It has not been a very good time for the derivatives market in the last two or three years.

Dr Lynch: The Reserve Bank undertook a review of the markets in Australia as they performed during the global financial crisis and it concluded that they managed quite well through that process. There were deficiencies in markets overseas and they are currently being addressed, so the whole regulatory framework around those markets is being improved. When you look at current trading say in environmental products in electricity derivatives which support the National Electricity Market and in products like RECs and NGACs, you tend to find the principal traders are either compliance entities or entities who are generating the certificates. In looking at last year’s data, intermediaries would be somewhere around 20 per cent of the market. Predominantly, it is a market which is made up of people who have either compliance obligations or are in the process of facilitating supply to the market.

CHAIR: For your members this is a business opportunity that they see because they can get involved in trading.

Dr Lynch: For some that would be the case as intermediaries, but for others they have significant liabilities to manage and they are looking for opportunities to manage them in the most effective way that they can.

CHAIR: Who are they?

Dr Lynch: They would include the electricity generators and retailers.

CHAIR: The electricity generators that we have seen before this inquiry so far—in fact, Verve Energy is one that has appeared a couple of weeks ago—have said that this is not going to make any difference to global greenhouse gas emissions, but it will be a $200 million hit to the Verve Energy bottom line without actually giving them any scope to reduce emissions. You will need to be more specific. What energy generators are saying that a carbon tax or an emissions trading scheme outside the global framework on pricing carbon is a good thing?

Dr Lynch: Through the AFMA processes we communicate fairly well to all of our members and seek feedback through that process.

CHAIR: I can well understand why banks, financial traders and so on think this is a good opportunity, but I am very specific about what electricity generators have come to you and said, ‘We want a carbon tax’, or, ‘We want an emissions trading scheme.’

Mr Jeffree: I can answer that a little bit. One of the things that they are definitely after is certainty. Certainty is the overwhelming concern of our members. That certainty is something that an ETS could provide because it would have that international dimension. It is a fairly standard thing to do and it could provide that long-term thing, as opposed to fixing a level now.

CHAIR: If we had an international dimension there would be no argument. The reason we are having an argument is that there is no international dimension and since Copenhagen it has become quite obvious that it is unlikely that there will be an international dimension in terms of a global scheme to price carbon for some time. How do you provide certainty on something where the price will continue to fluctuate up and down and businesses will not know what the cost is going to be from one year to the next?

Mr Jeffree: We already have electricity markets where the price fluctuates on a daily basis, sometimes with quite some volatility.

CHAIR: It sounds to me like the National Electricity Market that Western Australia is not a part of.

Mr Jeffree: It is just the geographical distance. The derivatives market that is formed over the electricity market is very beneficial to the generators and to the retailers in hedging their exposures and ensuring that during a time of high demand the retailers do not go bankrupt and during a time of low demand that generators do not.

CHAIR: But this is the point. In order to be able to manage your exposure there you will need to be able to get to some energy sources that substitute for what is currently there. In the case of Western Australia, Verve Energy has said that with or without a carbon tax or with or without an emissions trading scheme coal will continue to be 60 per cent to 70 per cent of the Western Australian energy mix and it will just be a straight cost to the bottom line, so there is no benefit but a lot of upside costs. You are saying that emissions-intensive, trade-exposed industries should be fully compensated, fully shielded or fully protected, but what is the point? If you are going to put a trading system in place where we have all this money going around, but those people who are actually the heaviest polluters are going to be shielded from any impact, then what is the point of the whole exercise?

Mr Jeffree: We could just go back to AFMA’s role. AFMA’s mandate is around how to form an efficient market to progress these things. The broader policy questions are outside our remit.

CHAIR: We are getting somewhere now. What you are saying is, ‘If you’re going to go down this path and you want to do this, then we think you should do a market based mechanism. We want you to do a domestic market based mechanism in Australia, irrespective of what happens in other parts of the world because we can assist you with constructing a market that’s going to be efficient, transparent and where there is market integrity. We may be able to put our expertise into the mix.’ But you do not take a position on the substantive policy issues, do you?

Mr Jeffree: Broadly.

Senator CAMERON: Mr Lynch, you seem to be concentrating on a carbon tax versus a market based scheme, but do you agree that there is another scheme in the political debate that you have not mentioned?

Dr Lynch: The options that we have discussed within the association have been very much focused on the proposal for a carbon pollution reduction scheme and, in the context of this inquiry, the question was raised as to whether a tax might provide a mechanism. Our view in relation to the tax is that we think it is inferior.

Senator CAMERON: I think the government agrees with that point of view, doesn’t it?

Dr Lynch: Yes, and in fact the government has a longer term commitment to an ETS, and that is something that we welcome.

Senator CAMERON: Do you agree that the government has said that there would be an interim carbon tax leading to an emissions trading scheme?

Dr Lynch: Yes.

Senator CAMERON: So, under the government’s proposal, it is not as if you are going to have a carbon tax forever, is it?

Dr Lynch: No, it is not. There are two propositions. There is a long-term proposition to have a carbon tax or an emissions trading scheme and then there is a question of how you might transition to an emissions trading scheme. That is the interim question of some kind of arrangement, fixed pricing or you can call it a tax, where that comes into play.

Senator CAMERON: So obviously with your interest in the financial market the sooner a trading scheme is in place the better from your members’ point of view?

Dr Lynch: The feedback from our members, which is consistent through the intermediaries, but also through the energy companies who are involved in our committee work, is that they think that the benefit of having forward price signals which are achieved through a market is going to be important for them in making investment decisions and will ultimately be most helpful.

Senator CAMERON: What discussions have you had about the coalition’s direct action scheme?

Dr Lynch: Internally we have not had significant discussions in relation to that. Our focus has been very much on the emissions trading scheme and the kind of parameters which we would believe would make that work efficiently. More recently it has been on the question of tax; that question was placed by the committee through its inquiry and then further in relation to the transition period as to how you might move from the current situation to an ETS potentially with a fixed price.

Senator CAMERON: So you want a trading system. You think a tax in the interim can be an appropriate first step towards a trading system. Do you agree with that?

Dr Lynch: Our preference would be to begin with an emissions trading system because we think it achieves the longer term outcomes.

Senator CAMERON: That might be a preference, but is there any great problem with having a period of a tax leading to the scheme, as outlined by the government and Professor Garnaut?

Dr Lynch: Our concern with what has been announced so far is more the length of that transition period. If there was to be a transition of that nature a one-year period would be better. A three-year or a five-year period would effectively mean that you are not going to get trading of carbon permits and you are not going to get a forward price beyond the fixed price period, so the start-up for the market is in effect delayed, potentially for a significant period. Even in the context of previous proposals, there was room for manoeuvre in terms of that transition, but we think something like a three-year or a five-year transition is probably too long. We think a one-year period would be better.

Senator CAMERON: Everybody has their views on what would be the optimal. Obviously you have to deal with getting this up and running, and that is what the government is trying to do now. I would like to come back to the issue where you said that you have not had much discussion about the direct action. Have you had any discussion about the direct action?

Dr Lynch: The considerations that have been placed before our committees were the ones in relation to the development of the scheme which was on the table and the current government proposals, to the extent that we have them, in relation to the transition process. We are aware that work has been done on direct action, but it is not something which we have developed submissions on. Clearly, a market based system is one where you believe that market prices and market price signals generated by an efficient market is the ultimate way to achieve abatement. Direct action is inconsistent with that.

Senator CAMERON: So I assume that you would be experts on markets, given that is your livelihood?

Dr Lynch: Yes.

Senator CAMERON: There has been a bit of debate, and I have asked the question to a number of submitters, on how a government using taxpayer money to provide incentives through a direct action program can be a market. Can you explain that to me?

Dr Lynch: I cannot. A market based system is one where we see an interaction between demand and supply and the parties that generate both elements through which a price is communicated to the broader economy. With that price to hand people who have liabilities can make decisions in relation to how they think they can best achieve abatement outcomes.

Senator CAMERON: Really you have not treated the direct action as a market based approach at all, have you?

Dr Lynch: Our role is in providing infrastructure to markets and facilitating the views of market participants.

Senator CAMERON: We have been told that it is a market based approach; you create a market for companies to bid for taxpayers’ funding. I have never heard that being described as a market before in any of the literature, have you?

Dr Lynch: I am not familiar with the detail so it would probably be inappropriate for me to comment on that.

Dr Lynch: A market, to me, is where there is a clear provision of demand and supply; you get an interaction between the two in which you set a price through which economic decisions are then made in relation to investment, consumption and other matters.

Senator CAMERON: That would be a general definition of a market in the financial area. Is that how you would describe the market?

Dr Lynch: Yes. Usually in the market there are multiple buyers and sellers interacting through which you achieve a price and an allocation of the resource in question.

Senator CAMERON: So it is a buyer and a seller, not a bidder for a government handout?

Dr Lynch: If someone is looking to buy, then they are bidding into a process. My understanding of a market is where you deal with multiple buyers and sellers and you get that normal interaction.

Senator CAMERON: Given the problems that we have had in the market with the global financial crisis, what checks and balances would the government need to put in place to ensure that there is no bubble created and that there is proper accountability in a carbon market?

Dr Lynch: Through the CPRS process that was established with the various mechanisms required to achieve market integrity. One of the decisions that was made in the context of this was that the carbon permits, if you like, would be treated as financial products so therefore the corporations law, in the normal sense, would apply to that as it does to other markets. With the market itself, we believe that there should be an auction process which I think is likely and the auction process would be set within defined parameters to again promote an efficient price formation process in the primary market. Further, through NGRS there would be again a process through which information would be made available to the market in terms of the evolution of supply and demand factors so that people participating in the market have access to information on a fair basis and enough information to make reasonable economic decisions in terms of trading in that market. I think there is a good regulatory framework within which this can be achieved.

Senator CAMERON: It has also been put that if you want certainty you do not achieve certainty by having a market price because the market price fluctuates and people do not know where they are at in terms of their investment decisions. Can you explain how that works from the real life approach on certainty?

Mr Jeffree: The spot price of any traded commodity, carbon permit or whatever it might be will vary, but there can be a forward market and that forward market can go out for many years. People can deal on that forward market and they can use that forward market price in a properly varying market to make investment decisions, get finance and that sort of thing. Where the price is fixed, it is very difficult for a market to deal with fixed periods and you cannot hedge for future tax changes. Also, the transition between a fixed price period and a floating price period is very difficult for markets to price. If that forward curve is in place with a fully floating market then people can get certainty, even though the spot price varies. Does that make sense?

CHAIR: You say business wants certainty, but the core business of your members is to have enough uncertainty so that people have an incentive to manage that uncertainty into the future; isn’t it?

Mr Jeffree: Our members are interested in creating a well functioning market.

CHAIR: I will just go back. The reason that you prefer, dare I say, the uncertainty or a fluctuating price that is set by the market as part of an emissions trading scheme to a carbon tax which is fixed is that obviously it becomes imperative that you manage your exposure against those fluctuations. As a business you need to make a bet or a judgment as to whether the carbon price is likely to go up or likely to go down and then you will hedge and buy the relevant products accordingly to insure yourself against the risk of the price going up or down.

Mr Jeffree: I do not think that is the case.

CHAIR: Why would you hedge if you do not have some uncertainty?

Mr Jeffree: If I can just finish? If you have a fixed price and you have an emissions target, there is no guaranteeing that that fixed price will meet that target.

CHAIR: I understand that argument.

Mr Jeffree: As time goes along if that fixed price is creating too low a reduction in emissions or too high a reduction in emissions there may become expectations that the fixed price or fixed price path will change in order that the final target, which might be the 2020 target, is met.

CHAIR: You are answering a separate question. If you are saying that a carbon tax does not give you any certainty either, I agree with that argument, but what you are saying is that a carbon tax which is not pitched at the right level will have to be increased at some point, so there is the uncertainty of the government continually having to change the price of carbon and the carbon tax without necessarily hitting the right mark for a particular emissions reduction target. Is that what you were saying?

My question was separate to that. From your point of view the uncertainty of a fluctuating carbon price is what creates the business opportunity for your members.

Mr Jeffree: Our members include generators, and those generators are very interested in locking—

CHAIR: You are the Australian Financial Markets Association.

Mr Jeffree: Yes. We have many of the leading generators and retailers of the major effected sector, which is the electricity sector.

CHAIR: They are the consumers of these financial markets that the other part of your membership is going to be putting on the table, but what is driving those products is the fact that there is uncertainty as to where a carbon price will track into the future; is that right? That is what a hedge is all about, managing future risk. I think you can quite easily say yes.

Mr Jeffree: I would not agree with that assessment.

CHAIR: What is your assessment?

Mr Jeffree: Our assessment is that a well-functioning carbon market is in the best interests of the generators and the retailers.

CHAIR: You are just repeating lines.

Senator CAMERON: I take a point of order. You cannot be argumentative with the witness. You are the chair.

CHAIR: To get that from you is quite funny. I saw Dr Lynch nod when Mr Jeffree said he did not agree. Dr Lynch, maybe you can comment. Surely the reason that there is a role for financial markets in the context of carbon trading—and you expressed it before—is for companies to manage the risk of the carbon price going beyond, by forward purchasing essentially, permits at a price today. If business assumes that the price is going to be higher in the future they would be able to forward purchase today at a lower price. This is to manage the risk of price fluctuations in carbon permits into the future; is that right or not?

Senator CAMERON: Under standing orders you cannot ignore a point of order. You can ask the secretary. The secretary will explain how you chair if you do not know how to chair.

CHAIR: I know how to chair.

Senator CAMERON: I have a point of order and you must take it. If you do not think that is right, then you need to ask the secretary.

CHAIR: Senator Cameron, get it out of the way, please.

Senator CAMERON: My point of order is that Mr Jeffree was part way through a response to your question. You then interrupted him and went on to a separate question to Dr Lynch. For the record, I want to hear Mr Jeffree and I am entitled to hear his answer to the question you asked.

CHAIR: There is no point of order. I am chairing the meeting. Dr Lynch, there was a follow-up question to clarify what I was asking about and I think you were in the process of answering it. Could you explain whether or not the products that your members would be providing, in terms of derivatives and other things that you have talked about, are about managing the risk of the carbon price going up or down in the future, compared to the position at the time when you make a decision as a company, a generator or whatever, as to whether you are going to buy those products or not?

Dr Lynch: The market will do a number of things. It is not just a question of purchasers. There could be people making supplies to the markets that may wish to achieve certainty. So, again, they can make investment decisions and know, for a certain period of time, that they have an income stream which will be at a given price or a given level. That can be helpful.

Markets do more than that. They enable people to manage their liabilities over the course of time. They may borrow or they may lend, depending on what their expectations of their particular firm might be.

CHAIR: I understand that. I am going back to the point that you made before that this market under an ETS would give companies the opportunity to forward purchase.

Dr Lynch: Yes.

CHAIR: Why would you forward purchase if it is not about managing the risk of price fluctuations into the future?

Dr Lynch: If you are hedging, then that is what you are doing.

CHAIR: That is my point.

Dr Lynch: The role of markets is to enable the reallocation of resources and risk in a way that is optimal. The issue that we have with a tax is that it does not allow that to occur in the same way, because it sets it at a fixed price that does not enable the supply and demands that normally interact to achieve the optimal outcomes to occur.

CHAIR: Which brings me back to where we started. If you are hedging, you are managing that risk. The reason you prefer an ETS to a carbon tax is that there is that level of uncertainty as to what the price will be in the future, because if there was not that level of uncertainty there would not be a need to hedge.

Dr Lynch: Mr Jeffree may have touched on this previously. Even with a tax there is an element of uncertainty because if you have a quantitative target and you fix a price for a period then the remainder, the floating period, must accommodate any imprecision in the price during the fixed price period. You do not eliminate uncertainty by way of a fixed price.

CHAIR: I understand that. The government tells us that the initial period will give certainty around the price, but I understand that. Our previous witness from Frontier Economics gave evidence that a carbon tax does not give you any certainty at all because the government will end up having to increase the tax. With a tax for a set period of time you have more certainty than with an emissions trading scheme because, by definition of things, the price will fluctuate and businesses out there will seek to hedge against the risk of the price fluctuating one way or the other. That is where your members come in that want to sell products to deal with these issues.

Mr Jeffree: It is not about selling products. Our members are a broad cross-section of the participants in these carbon markets and they are interested in an effective market outcome.

CHAIR: I would be very interested to get a list of your members that are not providing those sorts of financial products. Can you provide us with a list of businesses that are involved in your membership that put the proposition that a carbon tax or an emissions trading scheme now, in the absence of an appropriately comprehensive global agreement, is the way to go? I would be very interested in a list of your members on notice that are not actually involved in the direct provision of financial product services.

Dr Lynch: We can provide you with a list of members. That is not a problem.

CHAIR: Members who agree with that proposition that we should have an emissions trading scheme in Australia, in the absence of an appropriately comprehensive global agreement.

Dr Lynch: AFMA is an industry association. We represent the collective views of members. We do not seek to represent the individual views of each member. The view that you receive from AFMA is a collective industry view. It would not be appropriate for us to—

CHAIR: I would be interested to see the membership mix.

Dr Lynch: I think that is fine. Individual firms can and have made their own submissions to various processes during the development of an ETS.

CHAIR: Given that we are trying to address a global problem, I assume that you would agree with the proposition that in an ideal world we would have a global market to deal with what is seen to be a global challenge and that to have a domestic market outside of a global market will create distortions?

Dr Lynch: When we looked at the CPRS and were assessing the viability of the market that would flow from that, there was a clear view amongst our members that there would be sufficient critical mass in the market here to enable an efficient market to happen. The connectivity with the international market provides long-term benefit and opportunities to reduce abatement.

Senator CAMERON: On that point, New Zealand have implemented their carbon trading scheme. Do you have any interaction with New Zealand?

Dr Lynch: No. We have some interaction with industry associations there, but not in relation to this issue.

Senator CAMERON: I am still on this point. If there were significant problems in the market in New Zealand would you have heard about it?

Dr Lynch: Through our committee discussions people take learnings from other markets and reflect that in the views they put, but our focus in those discussions has been very much on the markets here because that is what we seek to—

CHAIR: Are you aware of the Chicago Climate Exchange?

Dr Lynch: Yes.

CHAIR: What has been happening to the Chicago Climate Exchange over the last three or four years?

Dr Lynch: I cannot comment on that. I am aware of the exchange, but I am not aware of—

CHAIR: I am presuming that you would have looked over it. If you are looking at setting up a market in Australia and you say that it has enough depth, scale, critical mass and liquidity, I would have thought that you would have looked at other examples around the world where people have tried to run a market like this.

Dr Lynch: The main focus in the development of discussions within AFMA and our position is in relation to the EU market where we thought that there were significant learnings that could be taken. There were in terms of the design of the scheme. Some considerable thought was given to the lessons in the EU. Also, people will be looking at New Zealand. New Zealand is still in the early stages, so I am not very sure if you can draw strong conclusions.

CHAIR: The EU provided more permits than there were emissions. You are nodding, so you agree with that. They provided 100 per cent free permits to trade-exposed industries. You are still nodding, so I assume you agree with that. We read a study in the media yesterday that in the first three months the Australian scheme, as proposed, would generate as much revenue in three months as the European scheme did over six years, even though Europe represents 14 per cent of world emissions and Australia represents 10 per cent of that, 1.4 per cent of emissions. What is proposed in Australia is hardly comparable to what was done in Europe, is it?

Dr Lynch: No. If you look into the principles which Mr Jeffree outlined in terms of what you need for an effective market, that issue of scarcity was one of the factors that was identified. If you have an overallocation of permits then it is going to be difficult to create a market.

CHAIR: Which, of course, is what they did in Europe. They had an overallocation of permits. It can be suggested that the European scheme is somehow superior, globally, because they have this scheme in place with all of these issues, but so far they have not put the sort of scheme in place that is on the table in Australia.

Dr Lynch: Again, from the commentary that I have seen on the EU scheme, because we do not operate in that, has been that it is in phase three of its development, but I have seen commentary in terms of emissions outcomes and how that has achieved abatement.

CHAIR: It is the question, as well as the cause and effect. I have seen commentary on that too, where Eastern Germany went through a period of industrial change and other things that happened through that period.

Thank you for your contribution to the committee. We really appreciate it.